Fed Gov. Philip Jefferson was confirmed to Federal Reserve Board of Governors’ second-ranking position with strong bipartisan support in the Senate.
Anna Rose Layden/Bloomberg
Philip Jefferson has been confirmed the Federal Reserve Board’s second ranking position by a Senate vote of 88-10 on Wednesday.
The full Senate vote on Jefferson’s nomination was the first of three such votes expected to take place this week. Fed. Gov. Lisa Cook is up for a full 14-year term on the board and labor economist Adriana Kugler has been nominated to fill a vacant seat that expires in 2026.
President Joe Biden nominated Jefferson, an economist by training and a former college administrator, to be the Fed’s vice chair in May, less than three months after the previous vice chair, Lael Brainard, departed the board to become the White House’s top economist.
Sen. Sherrod Brown, D-Ohio, who chairs the Senate Banking Committee, lauded Jefferson as a “respected economist” with “outstanding academic credentials and strong leadership experience,” in remarks on the Senate floor Tuesday afternoon.
“Dr. Jefferson possesses a strong understanding of how higher prices hurt the most economically insecure Americans and that access to good paying jobs is the best antidote to poverty,” Brown said, noting that Jefferson garnered unanimous support from the Banking Committee earlier this year.
Sens. Mike Braun, R-Ind., Josh Hawley, R-Mo., James Lankford, R-Okla., Mike Lee, R-Utah, Cynthia Lummis, R-Wyo., Rand Paul, R-Ky., Eric Schmitt, R-Mo., Rick Scott, R-Fla., Dan Sullivan, R-Ak., and Tommy Tuberville, R-Ala., voted against invoking cloture.
Jefferson joined the board in May 2022. Since then, he has delivered several speeches on the economy, monetary policy and financial stability. He’s also taken the reins of the Fed’s internal Committee on Board Affairs as chair and oversight governor for the office of the Fed’s chief operating officer.
“I will evaluate any future proposed final rules on their merits. My views on any proposed final Basel III endgame requirements for U.S. banking organizations will be informed by the potential impact on banking sector resiliency, financial stability and the broader economy stemming from the implementation,” Jefferson said during an open meeting about the proposal in July. “I look forward to reading and digesting the comments we received from the public, which will inform my future decision on any eventual proposed final approvals.”
Jefferson enjoyed broad bipartisan support in his initial confirmation, which was approved by a vote of 91-7. This broad-based support was unique among Biden’s Fed nominees. His first pick for vice chair for supervision, Sarah Bloom Raskin, had to withdraw from consideration among staunch Republican opposition.
Meanwhile Cook, a former economic professor at Michigan State University, was confirmed by the thinnest of margins, with Vice President Kamala Harris casting the tie-breaking vote to secure her position on the board.
Brown called the Republican criticism of Cook during last year’s confirmation process an “underhanded and unfair attack on an eminently qualified woman of color,” but noted she had “proved her naysayers wrong” during the past 17 months. He noted that, if confirmed, Cook would be the first Black woman to be granted a full term on the Fed Board.
Brown urged Senators to vote in favor of Cook and Kugler this week. If confirmed, Kugler — who worked at the World Bank Group and served as the Labor Department’s chief economist under the Obama Administration — would become the first Fed governor of Latin American descent. Brown said confirming her would not only give the Fed a full complement of seven governors, but also a jolt of needed diversity.
“Her confirmation will be a critical step forward in bringing more diverse perspectives to our nation’s central bank, not just diversity in the way these nominees look, but diversity in the way they think, something we simply have not seen much of in these kind of elitist institutions like the Board of Governors of the Federal Reserve,” he said.
Consumer advocates also encourage the Senate to confirm all three Biden nominees this week.
In a statement, Dennis Kelleher, head of the advocacy group Better Markets, heralded the experience of all three economists, arguing that their expertise will be needed to address various challenges faced by the Fed and the country as a whole in the years ahead.
“Beyond technical and professional qualifications, the nominees bring diverse perspectives to the Board, which will be critical to successfully navigating the many looming challenges on topics ranging from inflation and bank capital rules to resolution planning and ethics,” Kelleher said. “The American people will surely benefit from Drs. Jefferson, Cook, and Kugler’s diversity of upbringings, educations, experiences and views.”
Federal Reserve officials have maintained that the historic levels of participation in the central bank’s overnight reverse repurchase agreement facility is nothing to be concerned about.
Graeme Sloan/Bloomberg
A key indicator of excess liquidity in the financial system has been falling since May, a development that holds promise for banks but raises questions for financial stability.
The Federal Reserve’s overnight reverse repurchase agreement, or ON RRP, facility has seen usage decline from nearly $2.3 trillion this spring to less than $1.7 trillion through the end of August, its lowest level since the central bank began raising interest rates in March 2022.
For banks, this was a desired outcome of the Fed’s effort to shrink its balance sheet. As the central bank allows assets — namely Treasuries and mortgage-backed securities — to roll off its books, its liabilities must decline commensurately. The more of that liability reduction that comes from ON RRP borrowing, the less has to come out of reserves, which banks use to settle transactions and meet regulatory obligations.
“What we’ve seen is the decline in the Fed holding has mostly come through on the liability side in terms of a decline in reverse repos, rather than reserves,” Derek Tang, co-founder of Monetary Policy Analytics, said. “This is, of course, welcome news to the Fed, because the Fed wants to make sure that there are enough reserve balances in the banking system to operate smoothly. So that’s good news.”
Yet, as participation in the ON RRP — through which nonbank financial firms buy assets from the Fed with an agreement to sell them back to the central bank at a higher price the next day — shrinks, some in and around the financial sector worry that funds are being redirected to riskier activities.
Darin Tuttle, a California-based investment manager and former Goldman Sachs analyst, said the decline in ON RRP usage has coincided with an uptick in stock market activity. His concern is that as firms seek higher returns, they are inflating asset prices through leveraged investments.
“I tracked the drawdown of the reverse repo from April when it started until about the beginning of August. The same time that $600 billion was pumped back into the markets is when markets really took off and exploded,” Tuttle said. “There’s some similarities there in drawing down the reverse repo and liquidity increasing in the markets to take on excessive risk.”
The Fed established the ON RRP facility in September 2014 ahead of its push to normalize monetary policy after the financial crisis of 2007 and 2008. The Fed intended the program to be a temporary tool for conveying monetary policy changes to the nonbank sector by allowing approved counterparties to get a return on unused funds by keeping them at the central bank overnight. The facility sets a floor for interest rates, with the rate it pays representing the first part of the Fed’s target range for its funds rate, which now sits at 5.25% to 5.5%.
For the first few years of its existence, the facility’s use typically ranged from $100 billion to $200 billion on a given night, according to data maintained by the Federal Reserve Bank of New York, which handle’s the Fed’s open market operations. From 2018 to early 2021, the usage was negligible, often totaling a few billion dollars or less.
In March 2021, ON RRP use began to climb steadily. It eclipsed $2 trillion in June 2022 and remained above that level for the next 12 months. Uptake peaked at $2.55 trillion on December 30 of last year, though that was partially the result of firms seeking to balance their year-end books.
While it is difficult to pinpoint why exactly ON RRP use has skyrocketed, most observers attribute it to a combination of factors arising from the government’s response to the COVID-19 pandemic, including the Fed’s asset purchases as well as government stimulus, which depleted another liability item on the Fed’s balance sheet: the Treasury General Account, or TGA.
Regardless of how it grew so large, few expected the ON RRP to ever reach such heights when it was first rolled out. Michael Redmond, an economist with Medley Advisors who previously worked at Federal Reserve Bank of Kansas City and the Treasury Department, said the situation raises questions about whether the Fed’s engagement with the nonbank sector through the facility ultimately does more harm than good.
“The ON RRP, when it was initially envisioned as a facility, was not expected to be this actively used. The Fed definitely has increased its footprint in the financial system, outside of the usual set of counterparties with it,” Redmond said. “The debate is whether that increases financial instability, because obviously it is nice to have the stabilizing force of the Fed’s balance sheet there, but it also potentially leads to counterproductive pressures on private entities that need to essentially compete with the Fed for reserves.”
Fed officials have maintained that the soaring use of the facility should not be a cause for concern. In a June 2021 press conference, as ON RRP borrowing was nearing $1 trillion, Fed Chair Jerome Powell said the facility was “doing what it’s supposed to do, which is to provide a floor under money market rates and keep the federal funds rate well within its — well, within its range.”
Fed Gov. Christopher Waller, in public remarks, has described the swollen ON RRP as a representation of excess liquidity in the financial system, arguing that counterparties place funds in it because they cannot put them to a higher and better use.
“Everyday firms are handing us over $2 trillion in liquidity they don’t need. They give us reserves, we give them securities. They don’t need the cash,” Waller said during an event hosted by the Council on Foreign Relations in January. “It sounds like you should be able to take $2 trillion out and nobody will miss it, because they’re already trying to give it back and get rid of it.”
But not all were quite so confident that the ON RRP would absorb the Fed’s balance sheet reductions. Tang said there have been concerns about bank reserves becoming scarce ever since the Fed began shrinking its balance sheet last fall, but those fears peaked this past spring, after the debt ceiling was lifted and Treasury was able to replenish its depleted general account.
“If the Treasury is increasing its cash holdings, then other parts of the Fed’s balance sheet, other liabilities have to decline and there was a big worry that reserves could start declining very quickly,” Tang said. “The Treasury was going from $100 billion to $700 billion, so if that $600 billion came out of reserves, we could have been in trouble.”
Instead, the bulk of the liabilities have come out of the ON RRP, a result Tang attributes to money market funds moving their resources away from the facility to instead purchase newly issued Treasury bills.
The question now is whether that trend will continue and for how long. While Fed officials say the ON RRP facility can fall all the way to zero without adverse impacts on the financial sector, it is unclear whether it will actually reach that level without intervention from the Fed, such as a lowering of the program’s offering rate or lowering the counterparty cap below $160 billion.
A New York Fed survey of primary dealers in July found that most expected use of the ON RRP to continue falling over the next year. The median estimate was that the facility would close the year at less than $1.6 trillion and continue falling to $1.1 trillion by the end of next year.
Those same respondents also expect reserves to continue dwindling as well, with the median expectation being less than $2.9 trillion by year end and roughly $2.6 trillion by the end of this year. As of Aug. 31, there were just shy of $3.2 trillion reserves at the Fed.
“The Fed’s view is that there are two types of entities with reserves, the banks that have more than enough and they don’t know what to do with, and the ones that are having some problems and need to pay up to attract deposits, which ultimately are reserves,” Redmond said. “When there are fluctuations in reserves, it’s hard to tell how much of that is shedding of excess reserves by banks that are flush with them, and how much is a sign that this is going to be a tougher funding environment for banks.”
Tuttle said a balance-sheet reduction strategy that relies on a shrinking ON RRP is not inherently risky, but he would like to hear more from the Fed about how it sees this playing out in the months ahead.
“We have gotten zero guidance on the drawdown of reverse repo,” he said. “Everything is just happening in the shadows.”
A table is covered in debris and tree branches after Hurricane Idalia made landfall in Horseshoe Beach, Florida, on Wednesday. Hurricane Idalia has knocked out power to hundreds of thousands of customers, grounded more than 800 flights and unleashed floods along Florida’s coast far from where it came ashore as a Category 3 storm earlier today.
Christian Monterrosa/Bloomberg
WASHINGTON — Federal and state regulators said Friday they won’t punish banks and credit unions for compliance shortfalls in the recovery period after Hurricane Idalia.
Regulators also told financial institutions to monitor vulnerable investments, saying they would expedite applications for temporary facilities, and also encouraged lenders to meet impacted communities’ needs including being more flexible with local borrowers.
“Institutions should individually evaluate modifications of existing loans to determine whether they represent troubled debt restructurings or modifications to borrowers experiencing financial difficulty, as applicable,” the release noted. “The agencies recognize that efforts to work with borrowers in communities under stress can be consistent with safe-and-sound practices as well as in the public interest.”
The agencies’ disaster guidance comes as part of an interagency statement issued jointly by the The Federal Deposit Insurance Corp., the Federal Reserve Board, the National Credit Union Administration, the Office of the Comptroller of the Currency and state financial regulators.
Regulators also said they would expedite banks’ requests to operate out of temporary facilities. While the process normally requires a written letter, the agencies said firms can begin the process with as little as a phone call to their primary regulator.
The agencies also addressed the potential problems that impacted banks could have keeping in full compliance with publishing or regulatory reporting requirements related to the disaster. The statement advised banks to contact their primary regulator to report and receive guidance on any compliance shortfalls. The agencies say they likely will not penalize firms who take reasonable and prudent steps to comply and who keep their supervisors apprised of their situations.
At a time when many communities are facing hardship, the agencies also reminded institutions they may receive CRA credit for helping to meet local needs.
“Financial institutions may receive CRA consideration for community development loans, investments, or services that revitalize or stabilize federally designated disaster areas in their assessment areas or in the states or regions that include their assessment areas,” the statement noted.
The joint statement also encourages banks to take reasonable steps to monitor and stabilize assets vulnerable in the wake of Hurricane Idalia such as municipal securities and loans.
Senate Banking Committee ranking member Tim Scott, R-S.C., and House Financial Services Committee chair Patrick McHenry, R-N.C., would be in a position to rescind any banking rules if they are finalized within 60 legislative days of the opening of the 119th Congress in January 2025 if Republicans win both chambers and the presidency.
Bloomberg News
WASHINGTON — As Congress stirs back to life after its August recess, regulators are now up against a looming Congressional Review Act deadline to finish their most important rulemakings.
Should Congress and the administration flip to Republican control in 2024, the incoming Congress would be able to initiate a Congressional Review Act nullification of any rules issued within the last 60 legislative days of the prior Congress. Legislative days can be tricky to predict because of unscheduled breaks, campaign breaks and emergency sessions, but with all of that being considered the deadline for Biden’s regulators to finalize rules and publish them in the Federal Register would be in May or June of 2024.
The Congressional Review Act dynamic is always present in any election year, but it’s especially important this election cycle now that regulators have proposed a slew of important regulations in the wake of this spring’s bank failures — rules that would have a big impact on bank capital, fee income and supervisory stringency.
Here are the top rules under consideration by the Biden administration that regulators will have to compete ahead of that May/June Congressional Review Act deadline.
Wells Fargo overcharged nearly 11,000 accounts about $26.8 million in advisory fees from 2002 to 2022, the SEC said. The problem was said to have begun at Wachovia before Wells Fargo bought it in 2008 and was not caught until a decade after the acquisition.
Cooper Neill/Bloomberg
Wells Fargo is paying a $35 million fine and nearly $40 million in restitution to settle Securities and Exchange Commission allegations that its investment advice arm overcharged customers for years.
The company overcharged nearly 11,000 accounts about $26.8 million in advisory fees over the years, the SEC said in a news release Friday. The overcharging occurred from 2002 to 2022 and is partly connected with its crisis-era acquisition of Wachovia Corp., according to an SEC order outlining the settlement.
Wachovia and AG Edwards, an investment firm that Wachovia had acquired just before the crisis, gave certain customers discounts to their standard advisory fees — yet they sometimes failed to enter the discounts into Wachovia billing systems.
Wells Fargo did not catch the discrepancies for years after the acquisition, the SEC said, and its advisors continued to offer discounts that weren’t reflected in customer billing. The company learned about the issue in 2018 after Connecticut banking regulators asked about it, prompting a review at Wells Fargo that uncovered nearly 11,000 accounts nationwide were overcharged.
“Today’s enforcement action underscores the need for firms growing their businesses through acquisition to ensure that their growth does not come at the expense of client protection,” Gurbir S. Grewal, director of the SEC’s enforcement division, said in the release.
The Wachovia acquisition was far from ideal. It was part of the shotgun marriages of banks during 2008, as troubled mortgage portfolios at Wachovia and elsewhere helped bring the global financial system to its knees.
But the deal helped massively extend Wells Fargo’s reach and brought Wachovia’s expansive advisor network to the San Francisco bank.
Wells Fargo didn’t have much time to do due diligence on the deal during 2008, noted John Gebauer, chief regulatory officer at the risk advisory firm Comply. “But they had plenty of time after that transaction to run a smooth integration and to review what they bought,” Gebauer said.
The order highlights the importance of conducting extensive compliance checks on billing and other issues as the advisor industry continues going through a wave of consolidation, Gebauer added.
The process that advisors at Wells Fargo and its acquired firms used to offer discounts on preset fees for certain clients stopped in 2014. But some customers who opened up accounts before 2014 continued to be overcharged until last December, the SEC said.
In a statement, the company — which did not admit or deny the SEC charges — said it was pleased to resolve the issue.
“The process that caused this issue was corrected nearly a decade ago,” the company said. “And, as noted in the settlement documents, Wells Fargo Advisors conducted a thorough review of accounts and has fully reimbursed affected customers.”
Wells Fargo has reimbursed affected customers more than $26 million from the fees it overcharged and $13 million in interest, the SEC said.
The order said that staff had to manually input agreed-upon discounts to a new customer account setup tool, which “did not automatically populate” those one-off discounts. That was then transferred to a legacy Wachovia billing system that the order said is still in use today.
While Wells Fargo advisors could review the finalized information for discrepancies, the company “did not have policies or procedures” that required them to review and confirm the accuracy of charges, the SEC order said.
The company did have a quality control process in place from 2009 to 2014 aimed at flagging discrepancies — but it was only for accounts with more than $250,000 when they were opened, the SEC order said.
The quality control process spread to smaller accounts starting in 2014, but the company did not do a historical lookback to examine past discrepancies, the SEC said.
In Connecticut, where banking regulators first flagged the issue, Wells Fargo found that it overcharged 145 out of more than 57,000 accounts. Most of those dated back to the AG Edwards and Wachovia days.
Last year, Wells Fargo began using a tech-enabled process to identify errors for roughly 2.2 million accounts across the country. In all, the bank found it overcharged 10,800 other accounts.
The fine is one of a number of penalties the $1.9 trillion-asset company has paid in recent years, some much larger ones tied to consumer-abuse scandals.
Last December, the Consumer Financial Protection Bureau fined Wells Fargo $1.7 billion for shortcomings in auto loan, mortgage and deposit products. The company also agreed to pay $1 billion to shareholders in May to settle claims that its past leaders were overly optimistic on how quickly it would solve its outstanding issues with regulators.
CEO Charlie Scharf, who joined the company in late 2019, has said overhauling the company’s risk and control framework remains Wells Fargo’s “top priority and will remain so.”
Non-bank originator Change Lending has apparently lost a certification by the U.S. Treasury Department to issue non-qualified mortgages for underserved borrowers.
The lender, whose parent company is The Change Company CDFI did not respond to requests for comment Friday afternoon. The CDFI Fund declined to comment.
The government certifies CDFIs to serve Black, Hispanic and low-income communities and allows the lenders to be exempt from certain regulations, like the Consumer Financial Protection Bureau’s ability-to-repay rule. The “no-doc” lenders, who do not have to collect borrower income documentation, are required to provide the Treasury with data to prove 60% of their loans, both in number and dollar volume, are in compliancewith CDFI goals.
Under its CDFI certification since 2018, Change Co. has become one one of the nation’s largest non-QM originators, with $4.2 billion in volume last year.
A former Change Co. employee who filed the lawsuit in June in a California court claims he has documentation showing the company was “mischaracterizing the race, ethnicity, and income level of borrowers.” The complaint also alleges the lender made false representations to the buyers of its mortgage-backed securities. The Change Co. in June announced a $307 million securitization of its home loans.
A Barron’s investigation found the company in 2022 failed to meet its underserved lending requirements, although it told the publication it was exceeding its requirements. Barron’s reporting also revealed Change’s business with wealthy borrowers, including actor Johnny Depp.
The publication also noted the lender has removed CDFI logos and references from its website.
The company’s founder, Sugarman, was the former chairman and CEO of Banc of California before resigning amid a Securities and Exchange Commission probe in 2017. He touted Change Lending’s top non-QM status earlier this week in a LinkedIn post, and two weeks ago posted an apparent defense against some of the lending accusations, suggesting the lender was meeting its CDFI requirements.
“We believe that Black and Hispanic/Latino borrowers who are credit-worthy should get the exact same loans from the exact same lender as wealthy white borrowers,” he wrote. “Change does not discriminate… it serves all who qualify.”
House Judiciary Committee Chair Jim Jordan, R-Ohio, said in a cover letter for a subpoena to Citigroup last week that law enforcement’s use of “back-channel discussions with financial institutions” to collect data on suspects related to the Jan. 6, 2021, attack on the Capitol was “alarming.”
Bloomberg News
WASHINGTON — House Republicans’ subpoena of Citibank over concerns about how some large banks allegedly shared data with law enforcement may be the latest example of politics leaking into the banking sector, but banks shouldn’t easily dismiss the incident as partisan bickering.
Underlying the conflict is a longstanding tension between data privacy and banks’ obligations to cooperate with law enforcement, especially when it comes to anti-money-laundering and counterterrorism financing laws, experts say. It’s a growing concern for banks, as they grapple with how to walk the tightrope between cooperating with government agencies and protecting consumers’ privacy — and how to do that in an increasingly politicized country.
“Data is the lifeblood of the system, and it’s where you’re going to get the most details about someone,” said Brian Knight, senior research fellow at the Mercatus Center at George Mason University. “So if I wanted to paint a picture about somebody, I would go for the financial data because that’s going to tell you so much about a person and their views and their habits. Part of this is two sides yelling at each other, but underlying that is how that information is treated so it’s not abused by whichever side happens to have access to it.”
Last week, the House Judiciary Committee subpoenaed Citibank for documents related to House Republicans’ belief that major banks illegally shared private financial data with the Federal Bureau of Investigation related to the Jan. 6 insurrection at the U.S. Capitol.
House Republicans said they are concerned that at least one institution — Bank of America — appears to have shared some data about individuals who made certain purchases and transactions. The transactions in question include Airbnb, hotel or airline travel reservations in the Washington, D.C., area in the days leading up to Jan. 6.
Of particular concern to Rep. Jim Jordan, R-Ohio, chairman of the Judiciary Committee and the Select Subcommittee on the Weaponization of the Federal Government, is the release of data on individuals who purchased a firearm with a Bank of America credit card that supposedly went to the top of the list provided to the FBI, according to a cover letter attached to the subpoena.
The GOP lawmakers say this sharing was done without the proper process, although they don’t specify what that process would have been.
“Federal law enforcement’s use of back-channel discussions with financial institutions as a method to investigate and obtain private financial data of Americans is alarming,” Jordan said. “The documents received to date only bolsters our need for all materials responsive to our request.”
The letter to Citibank also included a screenshot of an email sent to Citibank and other banks from the FBI, inviting them to participate in a meeting on “identifying the best approach to information sharing.”
American Banker was unable to independently verify the accuracy of the letter’s accusations. Citi and Bank of America did not respond to requests for comment when the subpoena was issued, and the FBI did not immediately respond to a request for comment.
Experts say that the issue will come down to the details of how this information was allegedly provided, and an interpretation of the Right to Financial Privacy Act of 1978, which generally requires that individuals receive notice and an opportunity to object before a bank can disclose personal financial information to a federal government agency, often in the context of law enforcement. Typically — although with significant exceptions — law enforcement agencies need to file a subpoena to receive that information.
There’s an exemption to the law when terrorism is involved, or if a financial institution has filed a Suspicious Activity Report. Based on the public documents, it’s not possible to know if the FBI or the Financial Crimes Enforcement Network presented this as a domestic terrorism investigation to the banks.
Without knowing the precise nature of the request banks received from law enforcement, experts said it can be tricky for banks to know what to do when law enforcement agencies request information and where to draw the line between complying and protecting their consumers’ data.
“There is a perceived tension between complying with AML regulations and financial privacy laws,” said Alison Jimenez, president and founder of Dynamic Securities Analytics, Inc. “Banks need to provide nuanced training to staff on how to comply with financial privacy requirements, but without chilling compliance with SAR filings.”
Knight said it’s difficult to know what’s normal in these kinds of situations, because the public doesn’t usually have a window into this process. The incentives, however, favor banks erring on the side of providing information to law enforcement in the form of Suspicious Activity Reports.
“Banks are constantly complaining that the burden of complying with the suspicious activity reporting system is very high,” Knight said. “Because they have to file a lot of reports, and if they file a lot of reports and it turns out it was unnecessary, nothing happens to them. If they fail to file a report and it turns out that it was relevant, they get in trouble.”
Bankers generally lean toward complying with law enforcement requests, said Dina Ellis Rochkind, a lawyer at Paul Hastings. Since the 9/11 terrorism attacks, AML and anti-terrorism funding has tended to be one of the few bipartisan and industry-supported regulations in Washington.
“The banks, especially after 9/11, recognized that they needed to do more on national security,” she said. “Keep in mind that Wall Street is in New York, so AML rules are one of those things where banks work with the regulators to come up with workable solutions. The banks had a personal connection to the aftermath of 9/11 and willingly stepped up to safeguard the U.S.”
Knight said that, while he is unsure how this dynamic will play out, the ideal resolution would be for regulators and lawmakers to have a productive conversation about making SAR filings and other bank information available to law enforcement helpful in prosecuting crimes.
“My somewhat optimal scenario would be we’d have an intelligent conversation about the tradeoffs — about how useful this type of data is with suspicious activity reports,” Knight said. “Those things actually are for law enforcement, [but] are they actually useful for preventing terrorist attacks?”
Key findings about discrimination in home valuations are under dispute. That hasn’t stopped them from informing policy decisions.
During the past two years, regulators and lawmakers have introduced and adopted new rules and guidelines aimed at curbing the impacts of racial bias on home valuations. But some appraisers and researchers insist these efforts have been based on faulty data.
Conflicting findings from a pair of non-profit research groups call into question whether or not recent actions will improve financial outcomes for minority homeowners without leading to banks and other mortgage lenders taking on undue risks.
The debate centers on a 2018 report from the Brookings Institution, which found that homes in majority-Black neighborhoods are routinely discounted relative to equivalent properties in areas with little or no Black population, a trend that has exacerbated the country’s racial wealth gap. The study, which adjusts for various home and neighborhood characteristics, found that homes in Black neighborhoods were valued 23% less than homes in other areas.
“We believe anti-Black bias is the reason this undervaluation happens,” the report concludes, “and we hope to better understand the precise beliefs and behaviors that drive this process in future research.”
The study, titled “Devaluation of assets in Black neighborhoods,” has been cited by subsequent reports published by Fannie Mae and Freddie Mac, academics and White House’s Property Appraisal and Valuation Equity, or PAVE, task force, which used the data to inform its March 2022 action plan to address racial bias in home appraisal.
Meanwhile, as the Brookings’ findings proliferated, another set of research — based on the same models and data — has largely gone untouched by policymakers. In 2021, the American Enterprise Institute replicated the Brookings study but applied additional proxies for the socioeconomic status of borrowers.
By simply adding a control for the Equifax credit risk score for borrowers, the AEI research asserts, the average property devaluation for properties in Black neighborhoods falls to 0.3%. The researchers also examined valuation differences between low socioeconomic borrowers and high socioeconomic borrowers in areas that were effectively all white and found that the level of devaluation was equal to and, in some cases, greater than that observed between Black-majority and Black-minority neighborhoods.
“That, to us, really suggests that it cannot be race but it has to be due to other factors — socioeconomic status, in particular — that is driving these differences in home valuation,” said Tobias Peter, one of the two researchers at the AEI Housing Center who critiqued the Brookings study.
Contrasting conclusions
Peter and his co-author, Edward Pinto, who leads the AEI Housing Center, acknowledge that there could be bad actors in the appraisal space who, either intentionally or through negligence, improperly undervalue homes in Black neighborhoods. But, they argue, the issue is not systemic and therefore does not call for the time of sweeping changes that the PAVE task force has requested.
Brookings researchers have refuted the AEI findings, arguing that, among other things, their controls sufficiently rule out socioeconomic differences between borrowers as the cause of valuation differences. They also attribute the different outcomes in the AEI tests to the omission of the very richest and very poorest neighborhoods.
Jonathan Rothwell, one of the three Brookings researchers along with Andre Perry and David Harshbarger, said the conclusion reached by AEI’s researchers ignored the well documented history of racial bias in housing.
“No matter how nuanced and compelling the research is, no one can publish anything about racial bias in housing markets, without our friends Peter and Pinto insisting there is no racial bias in housing markets,” Rothwell said. “Everyone agrees that there used to be racial bias in housing markets. I don’t know when it expired.”
Mark A. Willis, a senior policy fellow at New York University’s Furman Center for Real Estate and Urban Policy, said the source of the two sets of findings might have contributed to the response each has seen. While both organizations are non-partisan, AEI, which leans more conservative, is seen as having a defined agenda, while the centrist Brookings enjoys a more neutral reputation.
Still, Willis — who is familiar with both studies but has not tested their findings — said while the Brookings report notes legitimate disparities between communities, the AEI findings demonstrate that such differences cannot solely be attributed to racial discrimination.
“The real issue here is there are differences across neighborhoods in the value of buildings that visibly look alike, maybe even technically the neighborhood characteristics look alike, but aren’t valued the same way in the market,” Willis said. “Whatever that variable is, Brookings hasn’t necessarily found that there’s bias in addition to all of the other real differences between neighborhoods.”
Setting the course or getting off track?
The two sets of findings have become endemic to the competing views of home appraisers that have emerged in recent years. On one side, those in favor of reforming the home buying process — including fair housing and racial justice advocates, along with emerging disruptors from the tech world — point to the Brookings report as a seminal moment in the current push to root out discriminatory practices on a broad scale.
“It’s been really helpful in driving the conversation forward, to help us better define what is bias and be specific about how we communicate about it, because there’s a number of different types of bias potentially in the housing process,” Kenon Chen, founder of the tech-focused appraisal management company Clear Capital, said. “That report really … did a good job of highlighting systemic concerns and how, as an industry, we can start to take a look at some of the things that are historical.”
Appraisers, meanwhile, say the Brookings findings made them a scapegoat for issues that extend beyond their remit and set them on course for enhanced regulatory scrutiny.
“What’s causing the racial wealth gap is not 80,000 rogue appraisers who are a bunch of racists and are going out and undervaluing homes based on the race of the homeowner or the buyer, but rather it’s a deeply rooted socioeconomic issue and it has everything to do with buying power and and socioeconomic status,” Jeremy Bagott, a California-based appraiser, said. “It’s not a problem that appraisers are responsible for; we’re just providing the message about the reality in the market.”
Responses to the Brookings study and other related findings include supervisory guidelines around the handling of algorithmic appraisal tools, efforts to reduce barriers to entry into the appraisal profession and greater data transparency around home valuation across census tracts.
But appraisers say other initiatives — including what some see as a lowering of the threshold for challenging an appraisal — will make it harder for them to perform their key duty of ensuring banks do not overextend themselves based on inflated asset prices.
Even those who favor reform within the profession have taken issue with the Brookings’ findings. Jonathan Miller, a New York-based appraiser who has deep concerns about the lack of diversity with the field — which is more than 90% white, mostly male and aging rapidly — said using the study as a basis for policy change put the government on the wrong track.
“There’s something wrong in the appraisal profession, and it’s that minorities are not even close to being fairly represented, but the Brookings study doesn’t connect to the appraisal industry at all,” Miller said. “Yet, that is the linchpin that began this movement. … I’m in favor of more diversity, but the Brookings’ findings are extremely misleading.”
Willis, who previously led JPMorgan Chase’s community development program, said appraisers are justified in their concerns over new policies, noting this is not the first time the profession has shouldered a heavy blame for systemic failures. The government rolled out new reforms for appraisers following both the savings and loan crisis of the 1980s and the subprime lending crisis of 2007 and 2008.
But, ultimately, Willis added, appraisers have left themselves open to such attacks by allowing bad — either malicious or incompetent — actors to enter their field and failing to diversify their ranks.
“It seems clear that the burden is on the industry to ensure that everybody is up to the same quality level,” he said. “Unless the industry polices itself better and is more diverse, it is going to remain very vulnerable to criticism.”
PNC’s securities are said to have yielded 1.73 percentage points over Treasuries, compared with early pricing discussions of 1.95 percentage points.
Stefani Reynolds/Bloomberg
PNC Financial Group Services has tapped the U.S. blue-chip bond market for the second time since a regional banking crisis rattled investors earlier this year.
The Pittsburgh-based bank priced $750 million of fixed-to-floating rate notes due in 2034 on Tuesday, according to a person familiar with the matter, who asked not to be identified as the details are private. The securities yielded 1.73 percentage points over Treasuries, compared with early pricing discussions of 1.95 percentage points, the person added.
PNC’s deal is the latest in a string of recent bank bond sales. Bank of America on Monday sold $5 billion of senior unsecured notes in four parts, while Goldman Sachs Group issued $1.5 billion of notes. The regional lender Huntington Bancshares also tapped markets for $1.25 billion of bonds.
The offerings come as companies rush to raise capital before the cyclical summer slowdown that typically kicks in toward the end of August. PNC last issued in early June, when it raised $3.5 billion of bonds.
For regional banks, there’s an incentive to tap investment-grade debt markets while funding costs are relatively low. The extra yield investors demand to hold financial bonds over average blue-chip debt has been declining since April, according to data compiled by Bloomberg.
On Wall Street, focus has also shifted to proposals from U.S. regulators that would require lenders to raise more capital to protect them from market shocks. That could lead to even more issuance, especially from regional banks, as lenders anticipate stricter rules.
Jacobs Engineering Group and Alexander Funding Trust II were also in the market with deals Tuesday.
Representatives for PNC, Jacobs Engineering and Alexander Funding didn’t respond to requests for comment.
Rohit Chopra, director of the Consumer Financial Protection Bureau said the agency is poised to propose a rule that would “ensure that modern-day data brokers in the surveillance industry know that they cannot engage in illegal collection and sharing of our data.”
Bloomberg News
Rohit Chopra, the director of the Consumer Financial Protection Bureau, on Tuesday plans to announce from the White House a new rule that would strictly limit the types of consumer data that can be sold by businesses as part of a federal crackdown on third-party data brokers.
The CFPB plans to propose rules that would require data brokers — or any other company in the surveillance industry — be covered by the Fair Credit Reporting Act. The 1970 law strictly limits the use of credit report data from being sold for any reason other than what Congress has specified as having a “permissible purpose,” such as credit underwriting. The law prohibits the sale of data for advertising, training and artificial intelligence.
Many third-party data brokers that collect, aggregate, sell and resell personal information are not currently covered by the FCRA, which mandates that credit reporting agencies and data collectors only collect and report accurate credit information. Individuals would have the right to obtain their data from third-party brokers and dispute inaccuracies.
“The CFPB will be taking steps to ensure that modern-day data brokers in the surveillance industry know that they cannot engage in illegal collection and sharing of our data,” Chopra said in prepared remarks. “Reports about monetization of sensitive information — everything from the financial details of members of the U.S. military to lists of specific people experiencing dementia — are particularly worrisome when data is powering ‘artificial intelligence’ and other automated decision-making about our lives.”
In March, the CFPB issued a request for information to better understand data brokers’ business practices and to ensure that they are complying with federal law. The bureau plans to issue a proposed rule by first convening a panel of small businesses that will take feedback on proposals.
The CFPB already has reached out to trade groups asking for a wide range of small business experts to serve on the panel. The small business panel, required by the Small Business Regulatory Enforcement Fairness Act, is expected to release an outline of proposals under consideration and the CFPB will issue a report by year-end summarizing the feedback. The CFPB may make changes to the proposal in a final rule that is expected to be formally proposed in 2024.
One of the proposals under consideration would designate data brokers as credit reporting companies under the FCRA if they sell certain types of data including a consumer’s payment history, income or criminal records. The CFPB is considering whether to outlaw the sale of so-called “credit header data,” which is the portion of a credit report that contains an individual’s name, birth date, Social Security number, phone numbers and current and past addresses. Data brokers rely on credit header data purchased from the three main credit bureaus to create dossiers on individuals.
For the past five years, credit reporting has been the most complained-about product. Last year, 76% of the complaints submitted to the CFPB were about credit reporting and specifically inaccuracies on credit reports.
Congress passed the FCRA in response to concerns about data brokers assembling detailed dossiers about consumers and selling this information to those making employment, credit, and other decisions. The CFPB has said that citizens have little choice about whether to enter into business relationships with data brokers or whether they will be tracked but the data being collected may play a decisive role in significant life decisions such as buying a home or finding a job.
The FCRA provides a range of protections, including accuracy standards, dispute rights, and restrictions on how data can be used. Enforcement of the FCRA is split between the CFPB and the Federal Trade Commission.
Reining in data brokers has drawn bipartisan support in Congress. In April, a House Energy and Commerce subcommittee held hearings in which lawmakers heard from several experts that claimed data brokers are threatening the civil rights of individuals by selling private health and other sensitive information without individuals’ knowledge or permission. Some advocates claim data brokers sell consumer credit data to predatory marketers and scammers.
“A stunning amount of information and data is being collected on Americans — their physical health, mental health, their location, what they are buying, what they are eating,” said Cathy McMorris Rodgers, R-Wash., during the fifth hearing focused on data brokers this year. The failure of Congress to pass a federal data privacy law that would replace state regulations has bolstered calls for more regulation of data brokers.
The CFPB declined to comment on specific companies that would be swept into a new rule. Senior CFPB officials said on a call with reporters late Monday that the agency “wants to ensure that all companies are held to the same rules and consumers are protected.”
A bank capital proposal issued by the Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency has many in the housing policy community concerned that revised risk weights for bank-held mortgages could further erode banks’ market share in residential mortgages.
Trade groups representing banks and various parts of the mortgage industry have come out against the rules, as have housing affordability advocates. These groups say the impact of the proposed rule changes would be felt by the housing sector more so than the banks themselves.
“In the housing sector, which has just been in a sort of boxing ring getting punched, one after another, and getting exhausted from all that’s coming at them, this one is pretty incredible,” said David Stevens, a long-time mortgage executive who now heads Mountain Lake Consulting in Virginia. “We thought the current Basel rule made sense, but this one’s going to have downstream effects that are going to be very broad in the housing system.”
The change is expected to have at least a moderate impact on banks’ willingness to originate. While banks have been steadily ceding market share to independent mortgage banks and other nonbank lenders since the subprime mortgage crisis, they still play a key role in the so-called jumbo mortgage market, which consists of loans too large to be securitized and sold to the government sponsored enterprises Fannie Mae and Freddie Mac.
“The big, traditional mortgage lending banks have largely exited the field and that’s been going on for some time. This is the next nail in the coffin,” said Edward Pinto, director of the AEI Housing Center at the American Enterprise Institute. “This nail will make it harder for banks to compete with Fannie and Freddie, generally, and then take the one market they’ve had left to themselves, the jumbo market, and make it harder to originate because of the capital requirements.”
Some policy experts say the bigger impacts could come from the second-order effects of the regulation. In particular, they point to the treatment of mortgage servicing assets — the salable right to collect fees for providing day-to-day services to mortgages — as a change that could crimp the flow of credit throughout the housing finance sector and lead to higher costs being passed along to individual households.
“With potential borrowers already facing record high interest rates, steep home prices, and supply-chain issues, increased fees and scarcity of bank lenders could be another brick in the wall stopping Americans from obtaining meaningful homeownership and wealth creation,” said Andy Duane, a lawyer with mortgage-focused law firm Polunsky Beitel Green.
The proposal, put forth by the Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller on the Currency, notes that the rule change could result in second-order effects on other banks, but it largely focuses on benefits that large banks could enjoy relative to smaller banks as a result of the new rules. It notes that such risks are offset by a requirement that banks adhere to both the new framework and the existing one, to ensure they do not see their regulatory capital levels dip below that of the standardized approach.
Still, the regulators are aware that the change could have unintended consequences on the mortgage industry and housing attainability. Because of this, their proposal includes several questions about the subject.
“We want to ensure that the proposal does not unduly affect mortgage lending, including mortgages to underserved borrowers,” Fed Vice Chair for Supervision Michael Barr said while introducing the proposal in an open meeting last month. He added that housing affordability was one of “several areas that I will pay close attention to and encourage thoughtful comments.”
However, the proposal dismissed the idea that the new risk weights on residential mortgages would have a material impact on bank lending in that space. Citing various policy papers, academic studies and regulatory reports, the agencies assert that the risk-weight changes would lead banks adjusting their portfolios “only by a few percentage points.”
Stevens — who served as an assistant secretary in the Department of Housing and Urban Development in the Obama administration, a commissioner for the Federal Housing Administration and president of the Mortgage Bankers Association — said he is not convinced regulators have done sufficient analysis to rule out the type of sweeping, negative implications that he and others fear. He noted that the 1,087-page proposal includes fewer than 20 pages of economic analysis.
“I just don’t think they’ve thought through the downstream effects and the lack of analysis, in terms of actual financial estimates of the implications, is really concerning,” He said. “This will be a really big change, and that’s why you see everybody up in arms and the trade groups aligned against this proposal.”
Like other components of the bank regulators’ Basel III endgame proposal, the components related to mortgages would create standardized capital rules for large banks and do away with the ability for large institutions to use internal models. It also extends these requirements to all banks with more than $100 billion of assets, rather than only the largest, global systemically important banks.
The key provision in the package of proposed rules is the use of loan-to-value, or LTV, ratios to determine risk-weights for residential mortgage exposure.
The change could allow banks to hold less capital against lower LTV mortgages, though there is some skepticism about much of a reduction in capital that change will ultimately entail, especially for GSIBs that previously relied on internal models, said Pete Mills, senior vice president of residential policy for the Mortgage Bankers Association.
“Those risk weights aren’t published, so we don’t know what they are, but they are probably lower than 50% for low-LTV products,” Mills said.
The Basel Committee’s latest regulatory accord, which was finalized in December 2017, envisions LTV ratios as a means of assigning risk weights. But Mills said many in the mortgage banking space were caught off guard by how much further U.S. regulators went beyond their global counterparts. The joint proposal from the Fed, FDIC and OCC calls for a 20 percentage point increase across all LTV bands, meaning while mortgages with LTVs below 50% are assigned a 20% risk-weight under the Basel rule, the U.S. proposal calls for a 40% risk-weight. Similarly, where the Basel framework maxes out at a 70% risk-weight for mortgages with LTVs of 100% or more, the U.S. version has a top weight of 90%.
Under the current rules, most mortgages in the U.S. are assigned a 50% risk weight, so loans with LTVs between 61% and 80% would see their capital treatment stay the same, and any mortgages with LTVs of 60% or lower would see a lower capital requirement. Loans with an LTV of 80% or higher, meanwhile, would likely see a higher capital requirement.
“For GSIBs, that’s probably an increase in capital throughout the LTV rank,” Mills said. “For the rest, it’s a higher risk weight for higher-LTV mortgages and maybe slightly lower in other bands, but, in aggregate, that’s not good for the mortgage market. It’s a higher risk weighting for most mortgages.”
Approximately 25% of first-lien mortgages held by large banks began with an LTV of 80% or higher, according to data compiled by the Federal Reserve Bank of Philadelphia. Roughly 10% have an LTV of 90% or higher, while half were 70% or lower.
Mark Calabria, former head of the Federal Housing Finance Agency, said he is not surprised by the proposed treatment of mortgages, calling it a “natural evolution” of where regulators have been moving. He added that some elements of the proposal resemble changes he oversaw at Fannie Mae and Freddie Mac in 2020.
Calabria said mortgage risk is an issue in the financial system in need of regulatory reform, but he questions the methods being considered by bank regulators.
“I worry that they’re making the problem in the system worse by driving this risk off the balance sheets of depositories, which is probably actually where it should be in the first place,” he said. “I’m not opposed to them tinkering in this space they just need to be more holistic about it.”
The proposal also notes that the new treatment of residential mortgages is aimed at preventing large banks from having an unfair advantage over smaller competitors.
“Without the adjustment relative to Basel III risk weights in this proposal, marginal funding costs on residential real estate and retail credit exposures for many large banking organizations could have been substantially lower than for smaller organizations not subject to the proposal,” the document notes. “Though the larger organizations would have still been subject to higher overall capital requirements, the lower marginal funding costs could have created a competitive disadvantage for smaller firms.”
Yet, while regulators say the proposed rules promote a level playing field, some see it giving an unfair advantage to government-backed lenders.
Pinto sees the proposal as a continuation of a decades-long trend of federal regulators putting private lenders at a disadvantage to the governmental and quasi-governmental entities. He noted that if securities from Fannie and Freddie and loans backed by the FHA and Department of Veterans Affairs, which tend to have very high LTVs, are not given the same capital treatment as private-label mortgages, the net result will be the government playing an even larger role in the mortgage market that it already plays.
Pinto said despite these government programs targeting improved affordability, their provision of easy credit only drives up the cost of housing even further. He added that he hopes regulators reverse course on their treatment of mortgages in their final rule.
“They should just back off on this entirely. It’s inappropriate,” Pinto said. “They need to look at the overall impact they’re having on the mortgage market, and the housing and the finance market, and the role of the federal government, and the fact that the federal government is getting larger and larger in its role, which is inappropriate.”
The other concern is a lower cap on mortgage servicing assets that can be reflected in a bank’s regulatory capital. The proposal would see the cap changed from 25% of Common Equity Tier 1 capital to 10%.
Mills said the capital charge for mortgage servicing rights is already “punitive” at a risk weight of 250%. By lowering the cap, he said, banks will be forced to hold an additional dollar of capital for every dollar of exposure beyond that cap. He noted that regulators had raised the cap to 25% five years ago for banks with between $100 billion and $250 billion of assets to provide some relief to large regional banks interested in that market.
If the cap is lowered, Mills said banks will be inclined to shed assets and shy away from mortgage servicing assets. Such moves would force pricing on servicing rights broadly, a trend that would ultimately lead to higher costs for borrowers.
“MSRs are going to be sold into a less liquid, less deep market, and there are consumer impacts here because MSR premiums are embedded in every mortgage note interest rate,” Mills said. “If MSR values are impacted by this significantly, that rolls downhill through the system. An opportunistic buyer might be able to buy rights at a depressed value, but that depressed value flows through to the consumer in the form of a higher interest rate.”
The proposal will be open to public comment through the end of November, after which regulators will review the input and incorporate elements of it into a final rule. Between the questions raised in the proposal, the acknowledgement by Fed and FDIC officials that the changes could hurt housing affordability, and the strong negative response to the proposal, there is optimism that the ultimate treatment of residential mortgages will be less impactful.
“Nobody seems to be pushing for this, and nobody other than the Fed seems to like it,” Calabria said. “If I was a betting man, it’s hard for me to believe that this is finalized the way it is now in terms of mortgages.”
William Mahon, George Kozdemba and Janice Weston conspired to falsify bank recordsshared withthe Office of the Comptroller of the Currency, according to the pleas lodged in federal court.
Andrew Harrer/Bloomberg
Three former board members of Chicago’s failed Washington Bank for Savings have pleaded guilty to trying to deceive the bank’s regulator to conceal rampant embezzlement.
William Mahon, George Kozdemba and Janice Weston conspired to falsify bank recordsshared withthe Office of the Comptroller of the Currency, according to the pleas lodged in federal court for the Northern District of Illinois this month.
The pleas are the latest legal moves in a yearslong case that stems from Washington Federal’s failure in December 2017, shortly after regulators learned the bank was insolvent and carrying at least $66 million in nonperforming loans. Since then, federal authorities have charged 16 high-ranking former employees of the bank with crimes ranging from fraud to conspiring to embezzle $31 million in bank money.
After the Office of the Comptroller of the Currency began to evaluate the bank’s loan portfolio before its failure, Mahon, Kozdemba and Weston made false entries in bank records in an attempt to obstruct the agency’s examination, according to a statement from the United States Attorney’s Office for the Northern District of Illinois issued after the pleas were entered.
“They also falsified records to make it appear Washington Federal was operating in compliance with banking rules and internal policies and controls,” the U.S. attorney’s office said in the statement.
The directors provided incorrect information on a range of topics, including loan approvals, loan maturity dates and borrower identities, according to the indictment of 14 defendants handed down in 2021.
Sentencing hearings are set for October and December, where Mahon, Kozdemba and Weston could each receive up to five years in prison, according to the U.S. attorney’s office. Mahon is also facing an additional three years for the willful filing of false income tax returns.
Attorneys for the defendants did not immediately respond to requests for comment.
Washington Federal’s former accounting firm, Bansley & Kiener, in 2020 agreed to pay $2.5 million to the Federal Deposit Insurance Corp. to resolve claims that it was liable for the bank’s collapse. Jan Kowalski, another defendant in the case, received three years in prison for fraud related to the bank failure earlier this year.
Prior to its failure, Washington Federal Bank had about $166 million of assets, $144 million of deposits and two branches in the working-class Bridgeport neighborhood of Chicago.
Bank CEOs and lobbyists argue against high capital requirements not because they harm the economy, but because they reduce the size of their bonuses, writes Dennis Kelleher, of Better Markets.
InsideCreativeHouse – stock.adobe.com
Well-capitalized large banks are essential for a strong banking sector, financial system and economy where Main Street families, businesses and community banks can thrive. That’s because appropriately capitalized banks are strong enough to continue providing credit through the economic cycle, in good times and bad, which keeps the economy growing and creates jobs. It also reduces the depth, length and cost of recessions that large bank failures usually cause. The only thing standing between a failing large bank, taxpayer bailouts and an economic downturn — if not catastrophe — is the amount of capital that a large bank has to absorb its own losses.
If large banks do not have enough capital to absorb their own losses and prevent their failure (i.e., if they are undercapitalized), then taxpayers end up providing that capital after the fact in the form of bailouts to prevent their failure and a collapse of the economy and a second Great Depression. That’s what happened recently with the failures and bailouts of Silicon Valley Bank, Signature Bank and First Republic Bank andwhat happened in 2008 with virtually all the giant Wall Street banks.
That’s why these large banks are called“too big to fail”: If they were allowed to fail, they would cause contagion and the collapse of the financial system and economy. It’s important to remember that the dangers to the country created by undercapitalized banks only arise from the largest, systemically important banks, which are those with more than $100 billion in assets, or just 33 out of the nearly 4,700 banks in the country.
Because history proves that undercapitalized large banks pose such grave and grievous threats to the country, policymakers and financial regulatorsmust require those banks to have sufficient capital to absorb the losses that their profit-making activities might cause. That’s why completion of the so-called Basel Endgame and othercapital measures are so important, as recentlydiscussed by Federal Reserve Vice Chair for Supervision Michael Barr and as proposed by the Fed and FDIC.
Unfortunately, what’s good for Main Street (well-capitalized banks) isn’t very good for Wall Street, especially for Wall Street CEOs and executives. While increased bank capital is essential to protect banks, the financial system and Main Street families’ jobs, homes and businesses, it reduces the size of bankers’ bonuses, which are greatly increased by having as little capital as possible. That’s becausebankers’ bonuses are based largely on what’s called return on equity (ROE) which is amplified by low capital and high leverage. Thus, the lower the capital a bank has the higher the ROE and the higher the executive bonuses.
This perverse anti-capital incentive is made worse by the threat posed by “too big to fail” banks. The CEOs of those banks don’t really have to worry about having enough capital or their banks collapsing into bankruptcy because, if they get into trouble, they won’t be allowed to fail and will be bailed out (as happened in 2023 and 2008). This is a moral hazard that incentivizes banks to engage in very high risk, highly leveraged activities that generate outsize returns and bonuses because if they fail, they get to shift their losses to taxpayers who fund the bailouts while the executives get to keep their bonuses.
Think ofthe Silicon Valley Bank CEO who had pocketed tens of millions of dollars in the years before it collapsed and then jetted off to his mansion in Hawaii literally as the FDIC was bailing out his bank to prevent its failure. That failure alone cost $16.1 billion, which was an injection of capital that the bank itself should have had to prevent its failure in the first place.
Put differently, if a bank CEO really doesn’t have to worry about his bank failing, then he really doesn’t care if his bank has enough capital to absorb losses and prevent a failure that won’t happen anyway. And, if that CEO’s bonus is bigger the less capital his bank has, then he wants to have the least amount of capital that he can get away with.
Unsurprisingly, Wall Street’s CEOs, trade groups, lobbyists, PR firms and allies never mention any of this. Instead, they repeatinaccurate, baseless and dangerous claims about capital requirements hurting lending, jobs, economic growth and competition — basically anything to avoid talking about their own bonuses. They are claiming that the real danger to Americans is from overcapitalized — not undercapitalized — banks. However, that is asmokescreen to conceal their self-interest in keeping the amount of capital as low as possible to keep their bonuses as high as possible. There is no evidence banks have ever been overcapitalized and there has never been a banking or financial crash caused by banks that had too much capital.
Regrettably, the large banks, their trade groups and allies are engaged in a comprehensive, coordinated and extremely well-funded two-part disinformation campaign. The first part is to deceive the public and elected officials into believing that higher capital hurts rather thanprotects them. The second part is to prevent regulators from requiring large banks to have enough capital to absorb their own losses and prevent failure, contagion, crashes and bailouts.
The real threat is from undercapitalized banks and regulators must require large banks to have enough capital to eliminate that threat.
Wells Fargo and BNP Paribas will pay millions of dollars in penalties for employees using unofficial communications like WhatsApp to conduct business as the Securities and Exchange Commission deepens its crackdown on how Wall Street keeps records.
Wells Fargo units agreed to pay $125 million to settle the cases and BNP will pay $35 million, the SEC said on Tuesday. In all 11 firms agreed to pay penalties, including a Bank of Montreal unit and a Mizuho Financial Group securities arm, to Wall Street’s main regulator.
In a separate actions, the Commodity Futures Trading Commission announced settlements in similar cases with units of four lenders including Wells Fargo and Bank of Montreal worth an additional $260 million.
Over the past several years the SEC and CFTC have been cracking down on firms skirting regulatory scrutiny by using services such as WhatsApp or personal email addresses for work-related communication, regulators said at the time.
Last September, the SEC announced $1.1 billion in fines against firms including Bank of America, Citigroup and Goldman Sachs Group.
Citizens Financial, Capital One Financial and Synovus Financial are among the banks that have recently announced steps to shrink specific parts of their lending businesses.
Bankers that long focused on growth have a new goal: getting smaller.
The goal isn’t universal, as some banks still see opportunities and are picking up the pieces their competitors are leaving behind. But much of the industry is slimming down.
Bankers are tightening their underwriting. They’re cutting back or calling it quits on riskier or less profitable businesses. And they’re selling loans they no longer want, which helps them shrink their balance sheets and raise cash.
“Growing in today’s environment, at the same rate as what you’re used to, is less profitable,” said Chris McGratty, head of U.S. bank research at Keefe, Bruyette & Woods, pointing to rising deposit costs that are narrowing the profits banks make on loans. “So banks are being more selective on what they put on their balance sheets.”
The slimming down is particularly prominent at banks with more than $100 billion of assets, which are preparing to comply with tougher capital rules from the Federal Reserve. Trimming risk-weighted assets improves a bank’s capital ratios at a time when some banks will likely have to start holding bigger cushions to guard against losses.
Capital One Financial in McLean, Virginia, put $900 million of its commercial office loans up for sale. Citizens Financial in Providence, Rhode Island, said it would stop offering loans to car buyers in collaboration with auto dealers. Truist Financial in Charlotte, North Carolina, sold a $5 billion student loan portfolio.
At Cincinnati, Ohio-based Fifth Third Bancorp, executives said they’re on an “RWA diet.” In other words, they’re reducing the company’s risk-weighted assets as they bolster capital ratios ahead of the new Fed rules.
Regional banks aren’t the only ones looking to get smaller. Banks “of all shapes and sizes” are seeing opportunities to exit certain businesses or sell some loans, said Terry McEvoy, a bank analyst at Stephens.
Banks may take a loss by selling loans below their original value, but getting rid of them earlier may also have benefits. For example, if a glut of office loans becomes available for sale, the properties’ values may plummet, causing bigger losses among banks that waited to sell, McEvoy said.
“Those that are the first to exit may get the best price when it’s all said and done, and we’re not going to know that for quite some time,” McEvoy said.
Banks are not retreating from all sectors equally. Big banks reported strong growth last quarter in their consumer credit card portfolios, even as some took a more cautious tone on auto lending.
Bank OZK, in Little Rock, Arkansas, is “cautiously optimistic about our continued growth prospects,” CEO George Gleason said. Many of the bank’s competitors “are shrinking and laying off some really good people,” Gleason told analysts, giving the $30.8 billion-asset OZK a chance to pick up talent and gain new customers. Most of the bank’s loans are in the real estate sector, particularly construction.
“We’re putting on really great quality new assets and getting paid well for it,” Gleason said. “So we view it as a very opportunistic time for growth.”
Advisers who help banks buy and sell loans are busy.
“The market for selling loans is very vibrant,” said Jon Winick, CEO of the bank advisory firm Clark Street Capital. He predicted there will be “a lot more selling” in the coming months.
In consumer banking, auto loan sales have been popular, and sales of home equity lines of credit are “on fire,” said John Toohig, head of whole loan trading at Raymond James.
Banks that are selling their HELOC originations can do so “at a premium, which is hard to do these days,” Toohig said. HELOCs are fetching good prices because other banks want the short-term, floating-rate loans. Those features balance out the 30-year mortgages sitting on banks’ balance sheets, particularly mortgages they made during the pandemic boom when interest rates were at historic lows.
“It’s very balance sheet-friendly for banks and credit unions,” Toohig said. “They love to own it as a way to offset some of that 30-year fixed rate that’s killing their margin.”
There’s also plenty of interest from banks in reducing their exposure to office buildings, whose values vary depending on their location, age and occupancy rate, as remote work becomes more popular.
Within the office sector, the main properties being sold right now are either “trophies” or “trash,” Toohig said. Loans backed by newer properties with healthy occupancy trends can fetch good prices. Other loans are clearly “in the ditch,” and banks are scrambling to figure out how to get them off their balance sheets, Toohig said.
Some lenders are also taking the opportunity to sell certain performing loans, as it gives them cash to pay off any borrowings they took on during this spring’s banking turmoil.
Columbus, Georgia-based Synovus Financial, for example, sold $1.3 billion in medical office loans. The credit quality of those loans “was so pristine that we were able to get what we believe was a very fair price,” Chief Financial Officer Andrew Gregory told analysts.
Hedge funds and private equity firms are willing to scoop up less attractive commercial real estate loans. But they’ll only buy them at a steep discount, and some banks haven’t yet accepted that their portfolios will fetch far less money than they’d like.
Banks may be willing to accept, say, 90 cents on the dollar for tarnished commercial real estate loans. The problem is that buyers are sometimes looking to buy riskier loans at just 60 or 70 cents, or even less.
“In a lot of cases, sellers just aren’t there yet,” Clark Street Capital’s Winick said. “They have the desire to sell at some level, but they don’t have the desire to sell at the market level.”
That hesitancy could cost banks if property values fall further, or if an office building suddenly runs out of tenants, Winick said. While absorbing a big loss early is costly, so is waiting and taking a bigger charge-off later.
“Your first loss is always your best loss, or usually your best loss,” Winick said. “I can give you a million examples where banks waited too long to move on a credit that was going sideways.”
The Federal Deposit Insurance Corp. ordered nonbank firm Unbanked, Inc. to cease its representations of being covered by deposit insurance Friday, one of a strong of similar actions the agency has taken in recent years to crack down on false representations of deposit insurance.
Bloomberg News
WASHINGTON — The Federal Deposit Insurance Corp. issued a cease-and-desist order Friday to an Alpharetta, Ga.-based cryptocurrency nonbank known as Unbanked, Inc., saying that the firm made incorrect and deceptive statements when it suggested various crypto-related products it offers were covered by FDIC deposit insurance.
FDIC said the company’s promotional materials on its website and social media account falsely suggested FDIC insurance encompasses cryptocurrency, and further implied the agency’s insurance would protect Unbanked, Inc.’s investors against potential losses. While the FDIC noted Unbanked has advertised it holds partner-banking relationships with two actual FDIC-insured banks, the agency strictly prohibits conflating such partnerships with deposit insurance coverage, particularly over digital assets, which the agency has explicitly said it does not cover.
“FDIC insurance does not cover cryptocurrency or digital assets,” the agency wrote in a press release announcing the action. “In addition, the FDIC only insures deposits held in FDIC-insured financial institutions and only protects against losses caused by the failure of an FDIC-insured financial institution.”
FDIC chair Martin Gruenberg has repeatedly said he will work to defend the reputation and credibility of its deposit insurance, something he says is threatened when non-banks misrepresent the nature of coverage. In an increasingly online banking ecosystem, a handful of companies have violated FDIC rules in recent years by incorrectly claiming their products are government-backed.
While not a primary regulator for the crypto industry itself, the FDIC is once again asserting its regulatory dominance over an area where it has unquestionable authority: How firms may represent deposit insurance. The agency’s ongoing diligence to ensure consumers clearly understand which products and companies are FDIC insured has largely defined FDIC’s approach to crypto regulation in recent years.
The Federal Deposit Insurance Act empowers the agency to regulate which companies can claim to be FDIC insured, how companies use the agency’s logo and name in advertising and which products companies may represent as FDIC insured. In short, companies are prohibited from employing the agency’s likeness to profit off of the FDIC’s long-cultivated reputation and trust.
In recent years, the FDIC has stepped-up its enforcement against such misleading representations by crypto non-banks. Last July, the agency sent a similar letter to the crypto exchange Voyager, and in August, it issued letters to failed exchange FTX and other companies, addressing their deceptive practices. It also issued similar cease-and-desist orders to crypto firms CEX.IO and Zera in February and to Bodega Importadora de Pallets — also known as Bodega — OKCoin USA, Inc. and Money Avenue, LLC in June earlier this year.
Teresa Bryce Bazemore, President and CEO of the Federal Home Loan Bank of San Francisco, announced her intention to retire after her current contract expires in 2024. The Home Loan Bank of San Francisco came under heightened scrutiny for issuing advances to Silicon Valley Bank and Silvergate Bank before they went defunct earlier this year.
Alex Lowy
Teresa Bryce Bazemore, who held a front-row seat during the bank liquidity crisis this year as president and CEO of the Federal Home Loan Bank of San Francisco, plans to retire when her term expires in 2024, citing personal reasons.
The San Francisco bank’s board chose not to renew Bazemore’s contract after she asked to retire in 2025, though her contract expires in 2024. The board instead initiated a search for a new CEO, said Simone Lagomarsino, the board’s chairman, who also is president and CEO at Luther Burbank Savings.
Bazemore “indicated that, due to personal and other considerations, she would like to retire in March 2025,” Lagomarsino said in a press release. “As a result, and in consultation with Teresa, the board has decided to move forward with a search to identify a new CEO who will deliver long-term continuity and engaged leadership.”
The decision followed “extensive deliberation and discussion” about the Home Loan bank’s long-term goals, including “the implementation and integration of strategic changes that may arise from the ‘FHLBank System at 100’ review currently being conducted by the Federal Housing Finance Agency,” Lagomarsino said in the release. “The board recognized the critical importance of a CEO who would be engaged for the next several years to lead the organization forward and implement a vision and strategy to align with the outcome of the FHFA’s review.”
The San Francisco Home Loan Bank played a central role in the bank liquidity crisis in March, when it served as lender of next-to-last-resort to Silicon Valley Bank, which was taken over by the Federal Deposit Insurance Corp. and ultimately sold to First Citizens BancShares in Raleigh, N.C. Other major borrowers of the San Francisco Home Loan bank this year included San Francisco-based First Republic Bank, which was sold to JPMorgan Chase in May, and Silvergate Bank of La Jolla, Calif., which self-liquidated in March.
Last year, Bazemore earned $2.4 million, which included a base salary of $910,000 and other incentive compensation. When she joined the San Francisco Home Loan bank in 2021, she received a $100,000 signing bonus. Her employment agreement provides for 12 months of severance pay, equal to her base salary, plus other awards, according to the Home Loan banks’ combined financial report for 2022.
Last year, the Federal Housing Finance Agency that oversees that Home Loan bank system, launched a holistic review of the government-sponsored enterprise, its first in 90 years. Critics have questioned the system’s hybrid public-private business model and whether the banks are engaged in the primary mission of supporting housing. FHFA Director Sandra Thompson is set to issue a report with policy and congressional recommendations sometime later this year.
Separately, Fitch Ratings on Thursday downgraded certain ratings of the Federal Home Loan banks of Atlanta and Des Moines citing the “high and growing general government debt burden,” of the U.S. government. The ratings actions followed the downgrade of the U.S. to ‘AA+,’ from ‘AAA.’
The Home Loan banks are bank cooperatives that provide low-cost funding to 6,500 members including banks, insurance companies and credit unions. Created in 1932 to bolster housing during the Depression, the system incentivizes banks to buy mortgage-backed securities and agency bonds that can be pledged as collateral in exchange for liquidity.
The Federal Deposit Insurance Corp. announced Friday night that Kansas-based Dream First Bank would be acquiring all deposits and most of the assets of shuttered Tri-State Bank.
Bloomberg News
The Federal Deposit Insurance Corp. announced Friday that it had entered into a purchase and assumption agreement with Dream First Bank of Syracuse, Kan., to assume all of the deposits of Heartland Tri-State Bank of Elkhart, Kan.
The announcement came shortly after the Kansas Office of the State Bank Commissioner shuttered Heartland and appointed the FDIC as receiver. The FDIC said the agreement will cause a $54.2 million hit to the Deposit Insurance Fund, which it says is the least costly resolution.
FDIC said Heartland Tri-State Bank branches will reopen normally under the Dream First Bank name on Monday, July 31, and customer accounts will automatically transfer over to the new company.
“Customers do not need to change their banking relationship in order to retain their deposit insurance coverage,” the FDIC said in a statement. “Customers of Heartland Tri-State Bank should continue to use their existing branch until they receive notice from Dream First Bank, National Association, that it has completed system changes to allow its branch offices to process their accounts as well.”
As of March 31, 2023, FDIC said, Heartland Tri-State Bank had approximately $139 million in total assets and $130 million in deposits. Dream First Bank will assume virtually all of the failed bank’s assets as part of the agreement.
The FDIC and Dream First Bank say they have struck a loss-sharing agreement on the loans they purchased from the now-dissolved bank.
The move is the fourth time this year that the FDIC has taken control — known as receivership — of a bank to protect depositors and find a buyer, the other instances being the failures of Silicon Valley Bank, Signature Bank and First Republic Bank.
The FDIC is obligated by statute to transfer operations to a healthy bank through purchase and assumption, or, failing that, to liquidate a failed bank’s assets to repay depositors and creditors. The FDIC is required to take whatever course results in the lowest cost to the Deposit Insurance Fund.
Friday’s announcement is far less impactful on the DIF than the bank failures from earlier this year. The Silicon Valley Bank and Signature failures represented an estimated $15.8 billion loss to the DIF, while First Republic’s sale to JPMorgan Chase resulted in a $13 billion loss.
“I think for most of us, it’s become a nonevent,” Hanes said. “This year most likely won’t be as good as 2022, but we’re open for business and generally positive.”
“It’s not something that is pretty easy to overcome,” Regions CFO David Turner says of possible upcoming capital requirements tied to the Basel III endgame. “We don’t think it’s necessary, but we don’t get to make the rules. We just have to adapt and overcome.”
Adobe Stock
Regions Financial says that it is planning for an increase in regulatory capital requirements and would be able to manage new regulations for risk-weighted assets, but it also said that raising the capital threshold is unnecessary.
David Turner, chief financial officer of the $156 billion-asset bank, told analysts Friday during the company’s second-quarter earnings presentation that Regions was expecting effective minimum capital standards to rise, and is preparing for a 6% risk-weighted asset requirement for banks over $100 billion of assets.
“Maybe there’s some tailoring,” Turner said, but based on a 6% threshold, Regions would need to raise an “incremental” $5 billion of debt. The potential capital requirement would create an “all-in cost” for Regions of around $35 million or a “bottom-line hit” of 60 to 70 basis points, he said.
“It’s not something that is pretty easy to overcome,” Turner told analysts. “We don’t think it’s necessary, but we don’t get to make the rules. We just have to adapt and overcome.”
The potential changes Turner was referencing could be part of a Federal Reserve proposal expected next week related to the final implementation of the Basel III international regulatory framework, also known as the Basel III endgame. The Fed has scheduled an open meeting to discuss it Thursday.
A series of bank failures that began earlier this year with the collapse of Silicon Valley Bank in March has prompted regulatory discussion led by the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp.
Policymakers and banking industry officials have debated back and forth about whether and by how much existing rules should be toughened to better insulate regional banks in particular from financial or economic shocks.
Key issues of the debate have circled around raising certain capital requirements to include banks with assets of $100 billion or moreand whether additional regulation would increase the cost of capital at traditional banks and tilt market activity toward less-regulated nonbank lenders.
The Birmingham, Alabama, bank will be able to “overcome whatever it is that we have to [meet]” if regulators enact new capital requirements, Turner said during Friday’s earnings call.
“We think the Fed’s going to give us all the time to adapt to whatever those changes are going to be without any major disruption,” Turner said.
Regions was among the hardest-hit regional lenders amid sudden deposit runoffs and other volatility that slammed the sector earlier this year. At the end of the first quarter, Regions reported a 2.5% decline in deposits since the end of last year and a 9% drop from the first quarter of 2022.
The bank’s total deposits declined further in the second quarter — to $127 billion — but at a slower pace. Deposits at June 30 were 1% lower than on March 31 and 8% lower than in mid-2022.
An analyst’s question to Regions about its exposure to office-related commercial real estate assets highlighted ongoing concerns about underlying risks that could be present throughout the banking industry.
The bank holds a $1.7 billion office portfolio, which consists of “well-secured” single-tenant assets with 82% considered investment-grade, Regions CEO John Turner told analysts.
He said that the bank’s multi-tenant office assets are based mostly in Sun Belt states and are “well diversified geographically.”
Regions reported net income of $581 million at the end of the second quarter, which was a 5% decline from the first quarter and flat compared with the same period last year. Net interest income fell by 2.5% during the second quarter to $1.4 billion but increased by 25% compared with the year-earlier period.
Noninterest income climbed by 8% to $576 million during the second quarter but declined by 10% compared with the second quarter of 2022. Regions cited gains in its capital markets and credit card businesses that were offset by declines in other categories which include service charges on deposit accounts.
Michael Barr, vice chair for supervision at the Federal Reserve, said in a speech Tuesday that artificial intelligence in mortgage underwriting could exacerbate racial bias if left unchecked.
Bloomberg News
The Federal Reserve’s top regulator is wary of the use of artificial intelligence in mortgage underwriting.
Speaking at the National Fair Housing Alliance’s national conference Tuesday morning, Fed Vice Chair for Supervision Michael Barr said advancements in mortgage origination technology could lead to discriminatory lending practices.
Barr called for transparency around the models used by artificial intelligence, or AI, programs. He also noted that the Fed factoring tech advancements into its bank oversight responsibilities under the Fair Housing Act and Equal Credit Opportunity Act.
“While banks are still in the early days of adopting artificial intelligence and other machine learning technologies, we are working to ensure that our supervision keeps pace,” Barr said. “Through our supervisory process, we evaluate whether firms have proper risk management and controls, including with respect to those new technologies.”
Barr’s remarks on AI supervision were part of a broader speech commemorating the 55th anniversary of the Fair Housing Act, a landmark piece of legislation prohibiting racial discrimination in housing sales and rentals.
Barr acknowledged that machine learning capabilities could be used to expand the availability of credit to prospective borrowers without credit scores. This can be done by capturing a wider array of information than what traditional credit rating agencies consider. If these programs operate at a large enough scale, he said, that could also enable them to expand credit more broadly.
Yet, he also noted that these AI programs could “perpetuate or even amplify” certain biases by drawing from data that is flawed or incomplete and thereby reach inaccurate conclusions about borrowers based on their race, color, national origin, religion, sex, familial status or disability. On the other hand, he added, inadequate technology could steer minority borrowers toward more expensive or lower quality financial products — a dynamic Barr described as “reverse redlining.”
Barr’s concerns around algorithmic bias are shared by other regulators in Washington. Consumer Financial Protection Bureau Director Rohit Chopra has been a frequent skeptic of AI-based underwriting and customer engagement. He has pushed for banks and other financial firms to exercise caution when using such technologies.
During his speech, Barr nodded to joint efforts by federal regulators to address bias in home appraisals. Last month, the Fed, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, the CFPB and the National Credit Union Administration issued two notices of proposed rulemaking, one that would establish best practices for the use of so-called automated valuation models, or AVMS, and another that would codify how borrowers could challenge appraisals that they believe to be inaccurate.
“Deficient collateral valuations can contain inaccuracies because of errors, omissions, or discrimination that affects the value of the appraisal, and a reconsideration of value may help to properly value the real estate,” Barr said. “I am fully supportive of both these proposals because homeownership is an important way for families to build wealth, and we should give them every opportunity to share in those benefits.”
Barr also gave a brief update on regulators’ efforts to reform the Community Reinvestment Act, a 1970s-era regulation that encourages banks to lend in the underserved communities around their branches. The current push aims to modernize the act to account for the impacts of digital and mobile banking, which enable banks to serve areas well beyond their physical locations.
Barr did not say when a final rule would be proposed, but he noted that regulators are working to incorporate the suggestions and address the concerns raised by members of the public earlier this year.
“The agencies are benefitting from the thoughtful comment letters we received on the proposal, and all three agencies are hard at work finalizing the rule,” he said. “Once finalized, it is my hope and belief that this new CRA final rule, in parallel with the existing protections of the Fair Housing Act and ECOA, will support bank lending, investing, and services that meet the needs of all communities, including those that continue to be underserved.”
